Blockchain’s next disruption: Insurance

Could a future of blockchain, smart contracts and the internet of things see the insurance industry completely automated? Sanne Wass reports.

For fear of missing out on what has been labelled the future of trade finance, blockchain technology is already being heavily explored by financial institutions around the globe. But insurance companies too are ripe for disruption, and they may be the next species to benefit from the blockchain evolution.

“I never use words like ‘fully automated’,” explains Sylvain de Crom, the head of research and development at Aegon. “But there are definitely massive potential gains.”

Speaking to GTR, he says that, although still in the early stages, the Dutch insurance company is part of a range of initiatives to explore how blockchain and distributed ledger technology can benefit the industry. One of them is B3i, a joint effort between now 15 insurance and reinsurance companies, which, since launching in October 2016, has been looking at how the new technology can help make data exchange between the companies more efficient.

De Crom, who himself is involved in the B3i project, says reinsurance was a good place to start for testing with blockchain technology, as it is a very paper-heavy process involving several actors, all of which have their own administrative systems and individual contracts with each other.

“If a large claim happens, the insurance company runs the claim through its administration systems and calculates what it means for the reinsurance contract in its own version of the truth,” de Crom says. “Then it tells the reinsurance company, which takes all the data, runs it through its own systems, calculates the impact in its own version of the truth and communicates that back to the insurance company. In the ideal solution, everybody ends up with the same number.”

But that doesn’t always happen, he explains. “It can lead to a lot of additional work and time spent on the whole claims process between the insurer and the reinsurer. If there’s a difference, settlement can take weeks to months.”

In the future world of blockchain, however, the many corridors of communication can be replaced with one network of insurers and reinsurers, who can easily interact on one shared ledger, on which they have agreed on a so-called smart contract – a deal written in a computer code that can be automatically executed based on certain parameters. Being tamper-proof, the ledger provides absolute transparency and accountability for all parties.

“We would no longer need a piece of paper but a piece of digital content that does calculations itself,” de Crom says. “Then, when there is a large claim, the insurance company feeds the data into the smart contract that has computational logic, and which calculates what that claim means for that insurance and all the reinsurance companies on that contract.”

Since everyone is sharing the same immutable ledger, and the same smart contract living on it, the numbers will be consistent. “You can essentially take a process that took weeks or months and turn it into something that u s in minutes, if not seconds,” he says.

Trade finance as a use case

The B3i initiative is just one of many use cases for blockchain in the insurance industry. Another is for the interaction between insurance companies and the policyholders – something that is especially relevant in the trade finance space, where deals can be complex and involve numerous actors, across borders.

A flurry of trade finance blockchain pilots and development activity is already underway, but many of these projects mainly focus on the banks, exporter and importer. In June, for example, seven European banks under the name Digital Trade Chain Consortium announced they are developing a blockchain trade finance platform for SMEs together with IBM. While the first edition involves just the buyer, seller, banks and transport company, the intention is to expand the project to include third parties, such as credit insurers.

Another example is Satoshi Systems, a start-up developing a platform using blockchain technology to “simplify the world of trade”. As with other solutions in this space, it is primarily an attempt to solve the inefficient communication that exists today between players in the trade ecosystem – be it the buyer, seller, financier, lawyer, logistics manager, warehouse and, not least, the insurer.

“The insurers are ready; they are very curious about this new technology,” Mugurel Ionita, the founder of Satoshi Systems, tells GTR. “It makes their life easier, communications lines shorter, while adding more accuracy and transparency. They really want to be onboard from day one.”

The start-up, which is currently testing its solutions in a proof of concept, has already partnered with a big insurance company to explore how they could benefit from the platform.

Each party, Ionita explains, is only given access to the items of data that is relevant to them specifically. For example, an insurer involved in a trade transaction would be able to monitor when the goods have been discharged from their premises, and when they arrive safely at their destination – or if they don’t.

You can essentially take a process that took weeks or months and turn it into something that runs in minutes, if not seconds.Sylvain de Crom, Aegon

“When things go wrong, that’s when the insurer starts becoming more active and starts asking, for example, ‘where are the goods, what are the conditions?’ Because this information is traceable on the blockchain: they have all the information available,” Ionita says.

The process of entering into agreements could also be made more efficient, transparent and secure when taking place on the blockchain. At a later stage, Ionita envisions his platform working as a marketplace where buyers can easily connect and enter into smart contracts with new sellers on a case-by-case basis around different aspects of the transactions, such as insurance, risk distribution and/ or financing – on the blockchain.

In terms of insurance specifically, he says it would enable insurers to participate in transactions where they have the expertise and can provide the relevant cover and best price. A local African insurance company, for example, may be interested in covering only the part of the deal where the goods are on African ground. “The trade gets divided into more manageable parts. You open up a market, whereas today you have the very big insurers taking the whole risk,” he says.

IoT: Eliminating human error

As is evident in the projects of Aegon, Satoshi and their peers in this space, blockchain and distributed ledger technology are ready to disrupt and enable not only insurers but the whole trade ecosystem by optimising multi-party interaction and ensuring reconciliation of data in real-time.

But the story doesn’t end there: combining this new technology with the idea of the internet of things (IoT) – namely the use of devices and sensors that automatically communicate and share data – could bring about a whole new world of opportunities to automate processes and eliminate the risk of human error.

“The key weakness of blockchain is the data entry point,” Peter Bidewell, chief marketing officer at Applied Blockchain, a blockchain applications development company, tells GTR. “You have got this perfect immutable ledger, this record of all the different transactions and events, but if the person who puts that information in in the first place gets it wrong, or lies, that doesn’t help anyone.”

With the IoT, on the other hand, the human intervention could be completely removed in certain parts of a deal. In a trade transaction, the most straightforward example is that of a GPS tracking the location of a container of goods at any given time. One could also imagine sensors measuring the humidity and temperature – this could be relevant in the trade of cotton, for example – while it is transported from A to B.

At the current stage, it’s more about simplifying the mess of paper and documents, signatures and approvals, settlements and instructions.Mugurel Ionita, Satoshi Systems

True, a GPS or thermometer is nothing innovative in itself, but what is pioneering is the fact that these can work together with the smart contract, which is automatically fed with data and can then automate certain actions according to that data. Humans are kept out of the process, eliminating human error while minimising disputes over the interpretation of the contract.

This could be especially interesting to insurers involved in a cross-border trade transaction. If something goes wrong – for example the permitted humidity or temperature is exceeded – a smart contract codifying specific conditions would trigger a notification to the insurance company that the goods have probably been corrupted. The blockchain would give complete and transparent information about where the goods are, who is responsible at the given time, and so on.

With more and improved data, the insurers will also,over time, be able to profile risk more accurately, by adopting other technologies such as big data platforms, which they can then use to offer more personalised cover.

Bidewell at Applied Blockchain even goes so far to suggest the possibility of automating the claims process. He recently co-authored a whitepaper that gives a stepby- step “real-world worked example” for the use of IoT, smart contracts and blockchain to automate a home flood insurance claim.

The example involves flood detection devices being installed in various locations in a home. In the event of a flood, trackers would automatically execute the smart contract and make the insurance claim. No human involvement is needed from flood to payment – techniques that he says could be relevant to other sectors.

Ionita at Satoshi, however, is sceptical about the idea being applied to a trade transaction, such as a flood in a warehouse, because of the size of the claim. “I wouldn’t go so far as to say that a claim can happen automatically on the blockchain. If the claim is US$50 or US$500 they may not need any people there, but if it’s US$500mn, there will probably be a bunch of people on top of it,” he says.

But Ionita does imagine other parts of the process being automated, for example the various settlements in a transaction.

“At the current stage, it’s more about simplifying the mess of paper and documents, signatures and approvals, settlements and instructions that are flowing in and out,” he says. “What happens today is, an insurer gets an overview of the trade, he issues an invoice, the invoice is sent via post or email, it is printed, maybe two people pick it up at the same time and they pay twice, or it gets lost or delayed, and that’s where it’s getting messy. On the shared ledger, all the settlements – the insurance, the warehouse, the inspection, whatever duties have to be paid – can settle automatically.”

At Aegon, de Crom also sees this as an opportunity, but further down the line. “Looking beyond the pilot, in the future, you could take this a step further and interface that with, for instance, a Swift terminal and have all the payments done automatically,” he says.

Past pilots have proved that this is already possible. Last year, Commonwealth Bank of Australia (CBA), Wells Fargo and Brighann Cotton conducted the world’s first interbank trade transaction combining blockchain technology, smart contracts and the IoT. It involved a shipment of 88 bales of cotton from Texas to Qingdao. Once the goods arrived at its final destination, the smart contract automatically triggered the release of funds.

Both Ionita and Bidewell also mention the possibility of using cryptocurrencies or a token system that all parties have agreed to. This could simplify payments and the lengthy chain of operations when it comes to cross-border settlements – especially when multiple currencies are involved.

Further potential of these new technologies may be beyond our imagination. For now, in the insurance space at least, blockchain is still a somewhat theoretical concept that is yet to see real-world and widespread adoption.

“Almost everybody is doing interesting and cool things with blockchain: learning, testing, running PoCs, so it’s definitely an interesting and hot topic at the moment,” de Crom says. “But remember, we’re at the infancy of this technology. The dust will settle down and the result is going to be something that is really good.”

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